A company boss has hailed a "ground-breaking" decision which she believes could end years of dispute over the treatment of small businesses claiming a research tax break.

A tribunal found against HMRC over its handling of a case involving Collins Construction, a client of Haverhill-based Research and Development (R&D) Tax Credit adviser Fiscale.

Fiscale technical director Eve Hopley welcomed a decision in the First-tier Tribunal (Tax Chamber) between Collins Construction Ltd and HMRC published on October 21.

“A Tribunal has found against HMRC in a ground-breaking decision which could bring an end to years of disagreement over the treatment of small and medium-sized enterprises (SMEs) claiming under the government’s R&D Tax Credit regime," she said.

HMRC refused two of the company’s Small and Medium-sized Enterprises (SME) R&D Tax Credit claims on the grounds that the R&D was both subsidised and sub-contracted, in contravention of the legislation. Now the tribunal has found against HMRC.

Originally, HMRC also challenged the existence of eligible R&D activity, but this was approved through the normal enquiry process.

Fiscale said it - along with other advisers - felt HMRC changed is position on subsidised and sub-contracted R&D subjecting small companies to lengthy and costly defences.

Many gave up because the cost of defending their position could be far greater than the claim, it said. 

Only the companies with sufficient reserves could afford to take HMRC on - which was unfair, said Fiscale.

“This tribunal result confirms that HMRC’s interpretation of the legislation was incorrect and we welcome this decision," said Ms Hopley.

Fiscale technical lead Adam Spriggs, who was responsible for representing this and other contested claims through HMRC enquiries, said the total figure impacted by the HMRC treatment nationally would be huge.

"The recent treatment of SMEs by HMRC has caused enormous stress to our clients and thousands of other SMEs who have had significant Corporation Tax refunds and credits held up or rejected," he said.

"The clients we have been representing to challenge HMRC’s interpretation, have more than £10m at stake."

Fiscale - which has worked closely with Edward Hellier, barrister at 11 New Square Chambers - has been contesting the HMRC position for three years.

In her decision, Tribunal Judge Sukul supported the outcome of an earlier First-tier Tribunal (Quinn (London) Ltd v HMRC).

“Objectively assessing the meaning which a reasonable legislature would be seeking to convey in using the words “contracted out” and “contracted out R&D”, we do not consider the broad interpretation suggested by HMRC to be appropriate,” she said.

Collins Construction's case was one of two lead cases which went to First-tier Tribunal after being refused R&D Tax relief under the SME scheme on both subsidised and sub-contracted grounds.

The other case was heard three weeks before the Collins case but the decision has yet to be released.

Fiscale chair John Mayhew said: “Hopefully, this result will re-instate the value of R&D Tax Credits by encouraging and incentivising SMEs to invest in innovation as Parliament originally intended.

Fiscale chairman John Mayhew (Image: Fiscale)

"I urge HMRC to offer redress to potentially thousands of SMEs who since late 2019 have had their R&D claims refused, abandoned on commercial grounds or who have agreed to settle at the lesser benefit through the RDEC process."

R&D Tax Credits were launched in 2000 and were designed to support UK companies working on innovative projects in science and technology. Thousands of companies across a range of sectors have benefited.

It was around 2019 HMRC began to focus on sub-contracted and subsidised R&D said Fiscale.

An HMRC spokesperson said: “We are considering the judgement.”

John Mayhew (Image: Fiscale)